The Market Today

Markets Hold Overnight Recovery Despite Extremely Disappointing Durables Report


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Weak Report on Business Investment to End 2019: The preliminary December report on durable goods orders was extremely disappointing and does nothing to assuage concerns about slowing economic activity heading into year-end.  Headline orders rose 2.4%, much stronger than expected, on a massive, 168.3% jump in defense aircraft orders.  Excluding the volatile transportation items, durable goods orders fell 0.1%, below expectations for a 0.3% gain.  Moreover, November’s ex-transportation orders were revised down from -0.1% to -0.4%.  The weakness was relatively broad-spread.  The key indicators of business investment in equipment, core capital goods orders and shipments both contracted.  Shipments of core capital goods items (non-defense, excluding volatile aircraft orders), an indicator of current-quarter business investment, were expected to rise 0.2% MoM but fell 0.4%.  Orders of core capital goods items, an indicator of future business investment, fell 0.9% MoM, the second-weakest reading of 2019. There were also negative revisions to November’s figures. In fact, five of the last six reports have been relatively disappointing, with October being the lone exception, and December’s report arguably the most disappointing. Bottom Line: In concert with some weaker consumption reports to end 2019, the soft report on business investment, and durable goods more broadly, will increase concerns of just how much the economy was slowing coming into 2020.

FOMC Meeting, Apple Earnings, Home Prices, Consumer Confidence: The FOMC’s two-day meeting kicks off today with results announced tomorrow.  At 8:00 a.m. CT, the November report on home prices from S&P CoreLogic is expected to show the pace of home price gains stabilizing and possibly accelerating.  At 9:00 a.m., the Conference Board’s January report on Consumer Confidence is expected to show confidence tick slightly higher.  Also on the calendar after the market close today are key earnings reports from Apple and Ebay.


YESTERDAY’S TRADING

Stocks Sold Off on Figures Showing Coronavirus Keeps Spreading: U.S. equities joined Monday’s global sell-off immediately on the opening tick and faded a midday recovery to finish near the bottom of their daily range. The S&P 500’s 1.6% decline was its steepest since October 2 as losses piled up for all 11 underlying sectors. Energy stocks continued to suffer from collapsing crude prices on growing fears that demand disruptions in China could cause a build-up in global supplies. Both U.S. and Brent crude tumbled more than 2.5% to start the week, adding to vicious declines that have unfold since the coronavirus entered the headlines in earnest. Since last Monday, both have dropped nearly 10% to multi-month lows. High-flying technology stocks, which racked up some of the sharpest gains in 2019, were the index’s second-worst performers.

Yields Sank Again: As fear ripped through the equity markets, investors diverted funds into traditionally safer assets such as the Japanese yen, gold, and government bonds. Following a brisk rally across Europe, Treasury yields remained firm for the duration of U.S. trading, ending the day near session lows. The 2-year yield fell 5.4 bps to 1.441% while the 10-year yield sank 7.6 bps to 1.608%, both the lowest levels since early October. The spread between the two tightened for a fifth-consecutive session to 16.3 bps, the narrowest since November 2019. Other spread metrics also made headlines as the 5-year yield fell below the 2-year yield for the first time since late November. While the Fed has signaled it expects to hold policy steady this year, the recent return of uncertainty has increased market speculation they may be forced to ease again this year. The year-end fed funds rates priced into futures contracts fell to 1.19%, the lowest since October 31, implying more than one rate cut this year.


OVERNIGHT TRADING

Equities Firm Up For Now as Investors Await More Virus Developments: The death count from the Wuhan virus was raised to more than 100 overnight and the number of infected in China grew to more than 4,500. Still, equities outside of Asia have stabilized Tuesday after a brutal Monday knocked 1.6% of the value of global equities. Equity markets in Asia that weren’t closed for the Lunar New Year slumped 0.9% while stocks in Europe had recovered 0.3% around 7 a.m. CT. S&P 500 futures were up 0.6% and near their highs of the day despite drags from 3M, Pfizer, and United Technologies after certain aspects of their earnings releases disappointed. The receding fears, at least for today, impacted other markets as well. While Chinese markets will be closed for the remainder of the week, futures contracts tracking the largest companies in the country leveled off after plunging more than 5% on Monday. Gold prices slipped with the Japanese yen and crude prices climbed for the first time in six days.

Interest Rates Tick Up but Remain Well Below Pre-Virus Levels: The virus’s impact on interest rates has been swift and severe, knocking 20 bps off the 10-year yield since U.S. markets reopened after the Martin Luther King Jr. holiday last Monday. In response to risk appetite licking its wounds overnight, Treasury yields inched modestly higher from Monday’s multi-month lows. Yields had moved lower on a headline that Hong Kong was implementing travel restrictions to China. However, the 2-year yield was 1.0 bp higher at 1.44% and the 10-year yield added 1.5 bps to 1.62% in front of a couple of key economic reports scheduled for release Tuesday. While markets fully expect the Fed to hold the target range steady after a day and a half of discussions, they are less confident in the Fed’s plans to do so for the rest of 2020. Despite a modest reversal overnight, futures contracts continue to price in a rate cut by the end of the year, potentially at the November meeting.


NOTEWORTHY NEWS

Soft Close to Strong Year for New Home Sales: New home sales fell unexpectedly in December and there was a cumulative negative revision of 32k annualized units that was spread across the prior three months. New home sales, which can be volatile and prone to revisions, closed out 2019 with a 0.4% decline to an annualized pace of 694k units, the lowest level in five months. Economists had expected sales would rise by 1.5% to a pace of 730k units. Accounting for more than half of the three-month revision, November’s 1.3% gain to 719k units was revised to a 1.1% loss to 697k units. While December’s new home sales report failed to reflect the benefit from unusually warm weather seen in several other housing series, the annual figures showed the positive effects of last year’s mortgage rate decline. Full-year sales rose 10.8% from 2018 and the pace of activity set a new cycle best of 729k in June.


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